Alitis Investment Update – August 2020

August 12, 2020:  It has been two months since our last investment update so we thought it would be a good time to provide another one.  Calm and orderliness has returned to the markets after the massive sell-off that occurred in March due to COVID-19.  This has resulted in decent returns for the Alitis Pools over the last few months:

Class E Units* 1 Mo 3 Mo 4 Mo 2020 YTD 1 Yr 3 Yr 5 Yr 10 Yr
Alitis Strategic Income Pool 1.3% 3.9% 6.4% 2.3% 3.3% 4.0% 4.6% 3.8%
Alitis Income & Growth Pool 1.9% 6.1% 8.9% -0.8% 2.5% 4.6% 4.7% 4.7%
Alitis Growth Pool 1.9% 6.7% 10.3% -4.5% -0.9% 4.6% 4.9% 5.4%
Alitis Private Mortgage Fund 0.7% 3.1% 3.8% 1.3% 4.4% 6.2% 7.8%
Alitis Private REIT 1.1% 1.7% 1.7% 1.8% 6.1% 9.7%
Alitis Private Real Estate LP 1.7% 2.2% 2.2% 3.6% 7.2% 8.3%

* All returns to July 31, 2020.  3 year, 5 year, and 10 year returns have been annualized.

The following provides further information on the strategies that we employed, as well as, what we see as we look ahead:

Fixed Income

One of our fixed income strategies is to diversify into different types of alternative fixed income investments and private debt to enhance returns. The liquidity stress in the fixed income markets that we saw in March showed us that these increased returns, specifically in alternative fixed income, come with a cost and that cost is volatility. Since then, our alternative fixed income investments have performed very well and on average gained over 18%.

Looking ahead: Central banks’ support of bond liquidity has been positive and we expect this support will continue for the near and mid-term. As we look further out, we believe that yields are near a lower bound and the stabilization of the corporate/high yield market will likely continue but at a much slower pace. Our thought is that the upside for traditional fixed income investments is lower than it was in March/April and given this belief, we are actively shifting away from fixed income towards stocks within our Income and Growth Pool. We believe there will likely be more upside available in stocks in the months and years ahead.

Mortgages

Mortgage investments have continued to do well during the COVID-19 crisis.  Most of the mortgage investments are in the residential sector which held up very well.  From the information we have received, very few borrowers are defaulting on their payments, so it seems to be business-as-usual at this time.  Commercial mortgages, which make up less than 20% of the holdings, are experiencing some issues but nothing that is concerning.  As mentioned in our last update, we were shifting some money from private mortgages to publicly traded mortgage investments as the expected returns were higher; public mortgages in the Alitis Private Mortgage Fund were increased from approximately 11% of the portfolio in February to 16% in July with some gains achieved.

Looking ahead: We continue to expect higher returns on public mortgages as prices increase and yields decline to be more in line with what we are seeing with the private mortgages. For the most part, however, we are expecting a return to normal circumstances.

Stocks

We have stayed cautious over the last few months as the COVID-19 situation has created conditions that are difficult to assess – high unemployment, massive government deficits, and significant intervention by central banks.  The conditions do not paint a rosy economic picture, yet the markets slowly marched upwards over the last couple of months and have provided some good gains.

Looking ahead: The strategy has not changed since our last update and we continue to be cautious as we expect to see volatility reappear.  We do expect to see more upside to stocks relative to bonds/cash and will slowly allocate more to stocks as the year progresses and opportunities arise.  As well, we are conducting due diligence on a few private equity investments and may add one or two over the next few months.

Real Estate

Alitis has predominantly invested in residential multi-family housing which is regarded as the safest category of real estate, and so far this year that has proven to be the case.  To gauge potential impacts, we looked back to the Financial Crisis of 2008-2009 to see how real estate reacted.  We found that the capitalization rates (“cap rates”) increased marginally which had the effect of slightly lowering the value of real estate.  We used this approach in valuing the properties held by the Alitis Pools in order to be conservative with our valuations.   The net effect is that real estate experienced a period whereby valuations remained flat for a few months. With respect to the outside managers we use, they have generally experienced limited ill effects due to COVID-19 so their valuations were fairly stable on average.

Looking ahead: As mentioned, there appears to be limited issues with respect to the vast majority of the real estate held, which is good news.  In fact, mortgage borrowing rates have dropped significantly with 10-year mortgage rates below 1.75%.  Some projects are getting financed at these rates which will result in excellent cash flow to the Alitis Pools.  This also means that we have cash to reinvest in new real estate projects. Alitis has committed to two new deals in Winnipeg and one in Victoria.  Overall, we are optimistic about the real estate portfolio and future returns.

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Thank you for taking the time to read this update and if you have further questions, please feel free to contact your adviser.

Sincerely,

Alitis Investment Committee

Mitchell Prothman, Todd Blaseckie, Thomas Nowak, Kevin Kirkwood

 

Disclaimer 

This report is provided, for informational purposes only, to customers of Alitis Investment Counsel Inc. (“Alitis”) and does not constitute an offer or solicitation to buy or sell any securities discussed herein to anyone in any jurisdiction where such offer or solicitation would be prohibited. Opinions expressed in this report should not be relied upon as investment advice. This report does not take into account the investment objectives, risk tolerance, financial situation or specific needs of any particular customer of Alitis. Each individual’s investment objectives, risk tolerance, financial situation and specific needs should be evaluated before making any investment decision.

Unless otherwise noted, the indicated rates of return are the historical annual compounded returns for the period indicated, including changes in security value and the reinvestment of all distributions and do not take into account income taxes payable by any securityholder that would have reduced returns. The investments are not guaranteed; their values change frequently and past performance may not be repeated. Unless otherwise noted, risk refers to the annualized standard deviation of monthly returns for the period indicated.

The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. Alitis assumes no duty to update any information or opinion contained in this report. Neither Alitis nor any director, officer or employee of Alitis accepts any liability whatsoever for any errors or omissions in the information, analysis or opinions contained in this report, nor for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.